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  Quotations - Invest  
[Quote No.29861] Need Area: Money > Invest
"The [U.S.] government’s [low interest rate monetary] policy [is creating] a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing. Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary but painful market corrections will only deepen the inevitable fall." - Ron Paul
U.S. Congressman in 2002. [The housing bubble eventually broke in 2006-9 as the subprime loan debacle, credit crisis, stock market crash of 2008 and the recession that followed.
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[Quote No.29862] Need Area: Money > Invest
"Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production [where borrowed funds were used for unproductive consumption and pure stock market and real estate speculation], we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end ... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. [The Great Depression, 1929-33]" - Friedrich A. Hayek
Famous free market/non-interventionist economist. From his thought-provoking book, 'Monetary Theory and the Trade Cycle', (1933).
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[Quote No.29871] Need Area: Money > Invest
"It’s vital to distinguish a panic (also known as a crash or a crisis) from a bear market. The most important feature of each is a significant, and perhaps drastic, fall of the prices of stocks, bonds and other securities. A panic is a transient phenomenon. Its duration is always less than a year, perhaps several weeks and sometimes just a day or two. Panics are occasionally financial but typically non-economic in nature. That is, financial developments can trigger them (as they did in 1929 and 2007), but economy-wide recessions – which develop neither overnight nor completely unexpectedly – do not. Examples of panics include shock outbreaks of war (such the attack on Pearl Harbour in 1941 and the outbreak of the Korean War in 1950); unforeseen military disasters (such as the fall of France in 1940 and of Singapore in 1941); and surprise political developments (such as the imposition in Canada of the War Measures Act and martial law in October 1970, and the events of 11 September 2001). A bear market, on the other hand, is a medium- and sometimes a long-term event. Its duration is usually more than a year, is sometimes several years and on a few occasions has lasted more than a decade. Recessions and depressions are their most common cause. Hence the onset of the Great Depression, whose intensity and duration varied from country to country, caused bear markets from 1930 to 1942; the recession of the early 1970s caused bear markets from 1974-79, and so on. A panic does not cause, but can help to trigger, a bear market. That is, the sudden and unexpected eruption of a banking, credit or other financial crisis on Wall Street can over time spill into Main Street. Just such a thing seems to be happening at the moment. The ‘sub-prime’ ruction that surfaced in August 2007 subsided in October-November. Another flare of increased force spread to the investment banking, commercial real estate and other sectors in January-March 2008 and dissipated in April-August. Finally, a panic of breadth and depth unseen in decades exploded in September-October. This most recent detonation, whose consequences market participants may well be exaggerating, is associated with an unaccustomed struggle among many households and businesses to secure the cheap and easy credit to which they have become addicted. It is also startling people into the belated realisation that the ‘economic fundamentals’ in the U.S., Western Europe and other places including Australia have actually been quite sick for quite some time and won’t return to health in a hurry. The present panic, like its predecessors, generates considerable day-to-day volatility of prices. A bear market, on the other hand, spawns a steadier downward grind. As a panic fades, volatility attenuates; but if a panic helps to trigger a recession, and a recession causes a bear market, then prices become less erratic but nonetheless slog lower for longer." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29872] Need Area: Money > Invest
" ‘As in every preceding [share market] crisis, the main cause was far too large a mass of credits – that is, of debts – for the amount of cash in which they were redeemable. Trade and speculation had long been so active, and too often recklessly expanded, that this disproportion had become dangerous, and a menace to our safety ... A serious reaction, a serious revulsion, was inevitable unless we moderated our pace and mended our ways. I could foresee that this vast and growing disproportion between the volume of credits and cash would finally lead to collapse.’ Henry Clews wrote these words, describing the Panic of 1907, exactly a century ago (see Fifty Years in Wall Street (John Wiley & Sons Investment Classics, 2006). Clews also investigated the American panics and crashes of 1812, 1819, 1825, 1837, 1857, 1873, 1881 and 1893. In each instance, he discovered, a boom built upon too little capital, too much debt and fevered speculation initially caused a financial panic and eventually produced an economic bust. Clews’ diagnosis is quite reasonable, but his prescription is utterly astonishing. How to still a panic and combat a bust? Enable or even force banks (solvent or otherwise) to lend even more, and encourage debtors (solvent or otherwise) to borrow yet more, than they had hitherto! Apparently, the cure of a hangover is yet another blinder; and the antidote to the drug addict’s withdrawal is an even stiffer dose of the narcotic that threatens his life. ‘In every panic very much depends upon the prudence and control of the money-lenders … This is tantamount to saying that all depends on the calmness and wisdom of the banks.’ Clews took great care to stipulate that ‘prudence and control’ and ‘calmness and wisdom’ do not imply any restriction of lending. Quite the contrary: he warned that ‘if [banks] lose their heads and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of [panic and bust will] ensue.’ " - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29873] Need Area: Money > Invest
"The action of commerce [in any economy], like a motion of the sea or the atmosphere, follows an undulatory line. First comes an ascending wave of activity [including increased credit/loans] and rising prices; next, when prices have risen to a point that [limits] demand, comes a period of hesitation or caution; then, carefulness among lenders and discounters; then comes the descending movement, in which holders simultaneously endeavour to [withdraw their money], thereby accelerating a general fall in prices. Credit then becomes more sensitive and is contracted [causing borrowers to deleverage]; transactions are diminished; losses are incurred through the depreciation [‘deflation’] of property; and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted, and insolvent firms and institutions must be wound up.’ [This is often called ‘the business cycle’.]" - Henry Clews
Quote from the book, 'Fifty Years in Wall Street'.
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[Quote No.29874] Need Area: Money > Invest
"While stock markets go up and down, by anywhere from 5% - 40% per year, called the business/economic/stock market cycle, they only have a general upward, increasing long-term trend of around 7% a year. The reason for this, in very simplified terms, is that the economy can only grow as fast as the people in it [=3% a year so doubles every 24 yrs], plus inflation [=2% a year], and what is exported (minus imports) [=2% a year]. Knowing this can help investors develop a long-term trend line for the share market that can tell them roughly when the share market is above trend or below and the investor can then try to find out why. It may be above trend because of unusually low interest rates and large amounts of credit in the economy being used for speculation on the rising real estate or share market. Investors should remember that share markets eventually return to the long-term trend and therefore avoid investing heavily when it is significantly above trend." - Seymour@imagi-natives.com

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[Quote No.29876] Need Area: Money > Invest
"The conception of the business/economic cycle that has prevailed since the early 20th century – and which rules the roost in Australia, Britain, Canada, the U.S. and elsewhere – owes most to Karl Marx. He saw that, before the Industrial Revolution, no general pattern of economic boom and bust had occurred.[True, economic crises often erupted when a king suddenly made war or confiscated more than his usual quota of his subjects’ property; but before the 18th century there was no sign of general and fairly regular expansions and contractions of financial and economic fortunes.] These cycles appeared on the scene at about the same time as factories and industrialisation. Hence Marx – who was hardly the first to confuse causation and correlation – erroneously concluded that business cycles were an inherent feature of capitalism. Apart from the Austrian School, all of today’s various schools of economic thought, regardless of their many differences, affirm this vital point: the business cycle originates somewhere deep within the bowels of the market economy. Marx believed that periodic depressions would get worse and worse until the masses would revolt and overthrow capitalism. Today’s political and economic mainstream, on the other hand, believes that the state can successfully manage the cycle’s ups and downs – and when things really go awry, the state must intervene massively and will ride successfully to the rescue. Albeit for very different reasons, both Marxists and mainstreamers agree that free markets are unstable. Unfortunately for today’s mainstream, some intractable problems accompany the assumption that the market economy triggers the business cycle. Perhaps most notably, because economists simply do not bother to reconcile their theories of the business cycle and of the price mechanism, they have long been utterly baffled by the peculiar breakdown of the entrepreneurial function at times of economic crisis. In the market economy, one of the most vital tasks of the businessman is to act as an ‘entrepreneur’ – that is, a man who buys equipment and hires labour in order to produce something that he intends (but cannot be sure) will reap him a return that outweighs his risk. In short, the function of the entrepreneur is to forecast an inherently uncertain future. Before embarking upon any investment or line of production, he must estimate present and future costs and present and future revenues – and therefore how much profit he might earn. If he forecasts significantly better than his competitors, he will reap substantial profits. The better his forecasts, the higher will be his profits. If, on the other hand, he overestimates the demand for his good or service, he will not fulfil his plans and may suffer losses. And if his losses are sufficiently severe, he will face bankruptcy, cease production and exit the market. The market economy thus contains a built-in mechanism, a kind of natural selection [and survival of the fittest - sometimes called ‘creative destruction’], which ensures (i) the survival and prosperity of the superior forecaster and (ii) the failure and extinction of the inferior one. This culling occurs gradually over time. Accordingly, at any given point in time we would expect that relatively few businesses would be incurring losses. Hence the very odd fact that demands explanation: how is it that, the business world periodically and suddenly suffers a cluster of severe losses? Why does the moment arrive when businessmen, who on the whole had hitherto been highly astute entrepreneurs, abruptly become dunces? Clearly, an adequate theory of the business cycle must explain the tendency, which has been observed time after time, of the economy to move from boom to bust and back to boom. It must explain why the modern world shows no sign of settling into any reasonable facsimile of a smoothly moving approximation of an equilibrium situation. In particular, such a theory must account for the mammoth cluster of errors which appears suddenly at a moment of economic crisis, and lingers through the bust (or recession, depression, etc., according to your preferred term) period until recovery. Fortunately, a correct theory of the business cycle does exist, even though today’s economists either ignore it resolutely or are blithely ignorant of it. This is inexcusable, for this theory is grounded deeply within – and has a long and honourable tradition in – economic thought. The theory owes its origins to the late-18th century Scottish philosopher and economist David Hume and the early-19th century English classical economist David Ricardo. Hume and Ricardo saw what Marx did not, and what his heirs in today’s mainstream will not: namely that another crucial institution rose to prominence alongside the factory, industrial and capitalist system in the mid-18th century. This was the fractional-reserve bank and its capacity to expand credit and the supply of money (first in the form of paper money or bank notes, and later in the form of demand deposits, a.k.a cheque accounts, that are instantly redeemable in cash at the bank) [For every dollar of deposits a bank using this system, depending on the required capital adequacy ratio required, could loan more than ten dollars]. Hume and Ricardo understood that the operations of these banks held the key to the mysteriously recurring cycles of expansion and contraction, of up and down and boom and bust, and profit and loss, that had first appeared in and had puzzled observers since the mid-18th century. The Humeian and Ricardian conception and analysis of the business cycle has several hallmarks. First, the natural moneys that emerge on the free market are useful commodities – generally gold and silver. If money were confined simply to these commodities, then the economy would work in the aggregate much as it does in unfettered markets: a smooth adjustment of supply and demand, and therefore no cycles of boom and bust. But the injection of bank credit adds a crucial and disruptive element. The banks expand credit in the form of notes or deposits which are theoretically redeemable on demand in gold, but in practice clearly are not. Fractional reserve banks, in other words, are inherently bankrupt. For example, if a bank has 1000 ounces of gold in its vaults and it issues instantly-redeemable warehouse receipts for 2500 ounces, then it has obviously issued 1500 ounces more than it can possibly redeem. Consequently and equally clearly, this bank is insolvent [i.e. cannot pay/fulfil its bills/financial obligations in time]. But so long as there is no concerted ‘run’ [withdrawal] on its deposits, i.e., no sudden and massive demand to exchange these receipts for gold, its warehouse-receipts function on the market as an equivalent of gold, and therefore the bank can expand (inflate) the country’s money supply by 1500 ounces of gold. Realising that the more they expand credit the greater will be their profits, the banks happily begin to inflate. As the supply of paper and bank money within a country (say, England) increases, the incomes and expenditures of Englishmen – and the prices of English goods – rise. The result of fractional reserve banks’ inflation is a boom within the country. But this boom sows the seeds of its own demise. For as the supply of money and incomes in England increases, Englishmen tend to purchase more goods from abroad. Moreover, as English prices rise, English goods begin to lose their competitiveness vis-à-vis the products of other countries which have not inflated, or have been inflating to a lesser degree. Englishmen begin to buy relatively less at home and comparatively more abroad, whilst foreigners buy less in England and more at home; the result is a deficit of the English balance of payments. But if imports exceed exports, then money must flow from England to foreign countries. And what money will this be? Probably not English banknotes or deposits, for Frenchmen or Germans or Italians have little desire to retain their funds in Perfidious Albion [the inflated currency]. These foreigners will therefore take their notes and deposits and present them to the English banks for redemption into gold. Hence gold will be the type of money that will tend to emigrate as the English inflation proceeds. But this means that English bank credit will be ever more precariously pyramiding atop a dwindling base of gold in the English bank’s vaults. As the boom proceeds, our hypothetical bank will expand its warehouse receipts issued from, say 2500 ounces to 4000 ounces, while its gold base dwindles to, say, 800. This bank, in other words, becomes ever more highly leveraged. As this process intensifies, this bank – and other banks that do business with it – will become frightened. Their problem is that they must redeem their notes for gold; yet this bank’s stock of gold is dwindling. Hence the banks will eventually lose their nerve, stop their expansion of credit and, in order to save themselves, contract their volume of loans outstanding. Often, this retreat is precipitated by runs on some banks (usually but not invariably the most heavily-leveraged) by panicked members of the public, who had also been getting increasingly nervous about the banks’ ever more shaky condition. This contraction of credit [credit crunch] reverses the economic picture: retrenchment and bust inevitably follow inflation and boom. The banks pull in their horns, and businesses suffer as the pressure mounts for the repayment of debt and downward pressure upon the prices of English goods and services mounts. As the prices of English goods and services decrease, they become relatively more attractive in terms of foreign products, and the balance of payments gradually reverses itself. As gold flows into the country, and as bank money contracts on top of an expanding gold base, the condition of the banks becomes sounder. Note carefully the discipline which a genuine gold standard – even when corrupted by fractional reserve banking – imposes upon banks, businesses and consumers. It is precisely this innate discipline that provides its ultimate and unassailable justification – and explains why politicians, central bankers and their shills in the universities and mass media despise sound (i.e., gold-based) money. One of its many virtues is that it renders total war economic unviable – which is precisely why a genuine gold standard was junked during the First World War, and why is has never returned. Hence the vital importance of the depression phase of the business cycle generated by fractional-reserve banking. It is not something to be avoided at all costs: rather, it is an inevitable consequence of the preceding expansionary boom, and is a necessary condition of a return to economic health. The preceding phase of boom makes necessary the subsequent phase of bust. During the depression, the market economy adjusts, removes the excesses and distortions of the previous inflationary boom and re-establishes a sound economic base. The depression is the disagreeable but indispensible reaction to the distortions and excesses of the boom. It is the hangover the drunk must suffer and the cold-turkey the addict must endure. Why, then, does the next cycle begin? Why do business cycles tend to recur? When fractional-reserve banks return to a sounder condition, they can resume their fraudulent raison d’être [reason for existing], namely the expansion of credit backed by thin air rather than genuine savings. The next boom is thus ignited, which sows the seeds for the next bust. But if fractional-reserve banking causes the business cycle, and if banks are a legitimate part of a free market economy, can’t we still say that the free market is the culprit? No. If not for the intervention and encouragement – indeed, the protective legislation – of government, the fractional reserve banks within a country would never be able to expand credit in concert. For if banks were truly competitive, any expansion of credit by one bank would quickly accumulate on the balance sheets its competitors, and these competitors would promptly call upon the expanding bank for redemption of this credit into gold. In short, a bank’s rivals will call upon it to redeem in gold in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it proceeded very far. In short, the fractional-reserve banks within a country can only inflate in unison when a central bank exists to cover their backs. Such a bank typically decrees the terms and conditions of the fiat currency, enjoys a monopoly of government business and also exercises a privileged position (imposed by government) over the entire banking system. It is only when central banks became established in major countries, and connived with fractional-reserve banks to inflate the money supply, that the banks were able to inflate for any length of time and the business cycle established itself. Hence the business cycle derives not from any failing of the free market, but from the systematic and pervasive intervention by the state into markets for money and credit. Government intervention, not laissez-faire, generates inflation and the expansion of credit; and when the inflationary boom ends, the depression-adjustment arrives. The state is not just the doting father of the boom: it is also the absentee parent of the bust." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29877] Need Area: Money > Invest
"A good analogy [for the role of government involvement in the business/economic cycle] is with a forest and fires. If nature is left undisturbed, then the detritus which accumulates on the forest floor will occasionally (say, every couple of years) alight. Yes, these fires destroy some young trees and some wildlife; yet they also release nutrients into the soil and thereby set the stage for regeneration. Human intervention into this natural state of affairs typically has perverse consequences. When well-meaning people actively prevent the occurrence of natural fires, then the detritus on the forest floor eventually builds to unnatural and dangerous levels. And when it finally (say, after a couple of decades) ignites, the fire is often severe enough to destroy most of the wildlife and trees. So too with the ‘managed economy’ [according to the Austrian School of thought about the economy]. By refusing to allow junk on the forest’s floor to alight, that is, by attempting to abolish the bust phase of the business cycle, well-meaning interventionists allow malinvestments to accumulate. But eventually they do ignite, and the rarer but much more severe conflagration (depression) causes much more damage than the more frequent but shorter busts would have. Today’s mainstream boasts [by economists and politicians] that present arrangements are ‘stable.’ Alas, they do not realise that they are not stable: they are merely artificial. [and eventually will come undone painfully]" - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29878] Need Area: Money > Invest
"Mises, the Modern Austrians and the Correct Cure for Busts: The Hume-Ricardo theory [that the boom and bust business cycle is the result of the fractional banking system supported by market intervening government policy] is essentially correct. But it leaves several features of the [business] cycle unexplained or incompletely explained. Building upon Hume and Ricardo, the Austrian economist Ludwig von Mises developed the correct and fully developed (in the sense that it subsumes more reality than any other, and is more consistent with the real world than any other) theory. Hints of Mises’ eventual solution to the puzzle of the business cycle first appeared in The Theory of Money and Credit (1912). Mises extended and elaborated his theory during the 1920s, and perfected it in his monumental treatise Human Action (1949). Friedrich von Hayek, who left Vienna to teach at the London School of Economics in the early 1930s, brought Mises’ theory of the business cycle to the attention of the English-speaking world. Hayek was Mises’s leading disciple, and published two books which applied and elaborated Mises’s theory: ‘Monetary Theory and the Trade Cycle’ (1933) and ‘Prices and Production’ (1935). Because Mises and Hayek were Austrians, and also because they advanced the tradition of the great 19th century Austrian School economists, this theory has become known as the “Austrian” theory of the business cycle. What does Mises reckon the government should do once the unavoidable bust, recession or depression arrives? If it genuinely desires that the country emerges as quickly as possible from a recession, what role should the government play? First, the central bank must cease its policy of inflation. It’s true that this will hasten the boom’s demise (if the fears of commercial banks haven’t killed it already). But the longer the government and the central bank wait, the worse the readjustment will have to be. The sooner they and everybody else face the music, the better. Second, the government must never try to support unsound businesses; it must never ‘bail out’ or ‘rescue’ or lend money to or otherwise ‘support’ businesses that find themselves in trouble. To do so is simply to prolong the agony and to convert an acute-but-transient condition into a lingering and chronic disease such as that which Japan has endured for most of the years since the late-1980s. Similarly, the government must never try to uphold wage rates or prices of goods and services or of stocks or bonds or real estate. These interventions will simply delay, prolong and correct the depression-adjustment. A third and closely-related point is that the state must not, in a misguided attempt to evade or short-circuit or otherwise lessen the harsh but necessary effects the depression, try to reinflate. In other words, it must not continue to suppress interest rates below the level that would prevail in an unfettered market. Even if this reinflation temporarily ‘stimulates the economy,’ it will simply brew greater trouble down the track. The government must not encourage consumption, particularly debt-financed consumption, and it must not increase its own spending [which is what Keynesian economic theory promotes to take-over the falling consumer and business spending in a recession], for this will further derange the appropriate ratio – which can only be discovered by individuals acting in free markets – between consumption and investment. The state, in other words, must completely disavow ‘fiscal stimulus packages.’ Drastically cutting the government budget and slashing taxation will improve the ratio; so too will eliminating as many regulations as possible. In short, and in order to purge the misguided ‘malinvestments’ of the boom, what both consumers and producers require is not more consumption and debt, but more saving and retrenchment. What the government should do, according to the Misesian analysis, is – apart from trim its own sails, clean its own stables and reduce the burdens it imposes upon its subjects – absolutely nothing. It should, from the point of view of economic health and for the sake of ending the depression as quickly as possible, maintain a strict hands-off or laissez-faire policy. Any intervention into – and thus bastardisation of – the market, any derangement of market signals and the [price: demand-supply] information they convey, will simply delay and obstruct the process of adjustment. The less the government tries to do, and hence the less damage it consequently does, the more rapidly will individuals be able to adjust to the reality the government had tried to deny and obey the natural laws of economics the state had presumed to flout, and quicker and the sounder the economic recovery that will ensue. [according to the Austrian School of thought.] The Misesian prescription is thus the exact opposite of the mainstream (interventionist) one. The government’s task is to keep its clumsy hands off the economy, and to confine itself to stopping its own inflation, eliminating its stupid and harmful regulations and cutting its bloated budget." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29879] Need Area: Money > Invest
"[According to free-market, non-interventionist, economic theory, often called the Austrian School, for the Austrians who developed it] …the best and brightest [politicians and economists] presume to know better than the mass of producers and consumers [whom philosopher and economist, Adam Smith famously called the ‘invisible hand’ of the market]; they are resolutely refusing to allow free markets and prices to prevail; and as a result they are making things worse rather than better. [by distorting the demand-supply-price signals in the market and the economy, throughout the business cycle, but especially in periods of recession.]… to force wages to rise is to force the demand for labour to fall – and hence to increase unemployment. Similarly, any attempt to force prices higher crimps the demand for goods and services. For example in the Great Depression]… On the day Herbert Hoover entered office, 1 million Americans were jobless. When FDR [Roosevelt] became president four years later, 8 million sought work, and after two four-year terms, 10 million were unemployed. When Hoover became president, Americans’ personal consumption expenditure totaled $79 billion; when he left it had fallen to $46 billion; after FDR’s first term it rose to $63 billion and after his second term it stood at $72 billion. Clearly, in 1940 America had still not recovered from the Depression, and recovery had to wait until after the Second World War." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29880] Need Area: Money > Invest
"Among [the French Revolution statesman and author Frederic] Bastiat’s better-known works is ‘Economic Sophisms’. It contains many strongly-worded attacks on statist policies, including the famous satirical parable known as the ‘Candlemakers’ Petition.’ Bastiat described a demand from the candlemakers’ guild to the French government. In order to prevent ‘unfair competition’ with their products, the guild insisted that the government to block the sun. Much like Jonathan Swift’s A Modest Proposal or Benjamin Franklin’s anti-slavery tracts, Bastiat used humour and rigorous logic pushed to its consequences to highlight the absurdity of government interventionism [as opposed to free markets and hands-off or laissez-faire government policy]. Bastiat taught us, and the Bailout of Abominations [in the 2008 credit crisis] forcefully reminds us, that ‘government is the great fiction through which everybody endeavours to live at the expense of everybody else’." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29881] Need Area: Money > Invest
"The glorious Lew Rockwell, in ‘The (Near) Death of the State’, reminds us that falling prices are good news, not bad (for buyers can stretch their dollars further), and that [interventionist] governments’ futile attempts to control prices invariably produce more harm than good. Writing in the spirit of the great Frédéric Bastiat, who parodied government intervention with devastating effect [ Rockwell invites us to imagine that the Fed[eral Reserve Bank], colluding with commercial lenders, creates an apple boom that drives the price of apples from $3 per kilo to $10. Anticipating that the price will continue to rise [inflation], businesses and individuals buy apples, borrow to buy them and even use them as collateral for loans. Now assume that the price falls to $7 per kilo. Not a single sparrow can fall without the government’s approval, and so this decrease of price [deflation] becomes a ‘problem.’ How can the government ‘manage’ it? Let’s say that it attempts to boost the price by forcing supermarkets to sell them at $10 per kilo. But consumers won’t pay $10, so the apples rot on the shelves. The government says the bust (i.e., the glut of apples and the consequent downward pressure upon their price) and not its cause (namely the policies that artificially boosted the price in the first place) is the problem. Having misdiagnosed the problem, the government proceeds to mull misguided ‘solutions.’ Should it assist people who borrowed to buy apples? Should it buy the apples of people who borrowed against them and are now ‘under water’? Should it guarantee the loans of banks who lent on the security of apples? Partly nationalise the apple and lending industries? After trying these measures and watching them fail, the government decides to ‘show decisive leadership.’ In order to ‘protect’ apple owners and ‘support’ lending to buy apples, the government decrees that it will buy all apples (at $10 per kilo) and all supermarkets (at a price which it will determine) and then force ‘its’ supermarkets to buy all of ‘its’ apples! The trouble is that one intervention always leads to another, even more absurd and eventually draconian intervention. The government can imprison anybody who doesn’t want to pay $10 for a kilo of apples. But this extreme doesn’t alter its ‘problem’ one iota: if left alone, buyers and sellers will exchange apples at significantly less than $10 per kilo. The government’s actions may well obscure, but cannot alter, this essential fact. Any attempt to change it is like trying to repeal the law of gravity. Of course, the central bank can [by allowing inflation to rise] inflate wildly and raise all consumer prices to the point that apples nominally cost $10 per kilo. But this is purely cosmetic: in real terms, the price hasn’t budged. Whether it’s apples or houses or any other good or service, government’s real problem is that it’s unwilling to tolerate free trade among consenting adults, and its myriad and increasingly crazed attempts to countermand free-market exchanges are pointless and destructive." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29882] Need Area: Money > Invest
"Looking back the great American ‘stabilisation’ [and boom] of 1922-1929 was really a vast attempt to destabilise the value of money in terms of human effort by means of a colossal programme of investment [driven by too easy credit] ... which succeeded for a surprisingly long period, but which no human ingenuity could have managed to direct indefinitely on sound and balanced lines. [and therefore it ended dramatically in the huge 1929 stock market crash followed by the Great Depression]" - D.H. Robertson
in 'How Do We Want Gold to Behave?' ('The International Gold Problem', Humphrey Milford, 1932),
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[Quote No.29883] Need Area: Money > Invest
"A rising CPI [Consumer Price Index that measures inflation], as students of the Austrian School [of economics] well know, is an eventual consequence of inflation, but it is not the same thing as inflation. What is inflation? It is an expansion of the supply of money. In a fiat monetary system, only central banks can inflate the supply of money; and during 2007, inflation in Australia approached 20% [not the official figures that understated it at 3%]. Hence central banks do not fight inflation: they create it. Only they – and nobody else – can do so. Inflation is an inevitable consequence of interventionist government. By creating inflation, which corrupts interest rates by suppressing below the level that would prevail in a free market, central banks encourage consumers and investors to borrow. Alas, artificially-low rates beget unaffordable spending sprees and poor investments. Central banks and governments unleash a damaging cycle of boom and bust. Hence they do not tame the business cycle; they worsen it. It is not the allegedly ‘high’ [interest] rates of 2005-2007 that have caused the trouble [of the 2008 credit crunch, subprime debacle and following recession]: it is the artificially low rates (if they weren’t so, then why has borrowing grown so much more quickly than output?) of the past 15 years that have accumulated trouble." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29884] Need Area: Money > Invest
"How did our economy reach this point [with a credit crisis, the need to bail out so many banks and a looming long and deep recession]? Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions – along with low interest rates – made it easier for Americans to get credit. Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit – combined with the faulty assumption that home values would continue to rise – led to excesses and bad decisions [malinvestments]. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on. Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected – along with mortgage payments they could not afford. As a result, many mortgage holders began to default." - George W. Bush
U.S. President. Quoted from his Address to the Nation (24 September, 2008) to tell the American people about the reason the government needed to help the banks recapitalise to overcome the credit crunch caused by the drop in value of securitised subprime and poor quality loans.
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[Quote No.29885] Need Area: Money > Invest
"Democracy, remember, is a means whereby two wolves and a lamb decide by majority vote what will appear on the dinner menu. [The lambs - minorities - will always have trouble!]" - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29886] Need Area: Money > Invest
"... this long period of gearing up by households might now be approaching an end. Certainly household credit growth is much slower at present [during the current credit crisis] than it has been for some years, running roughly in line with income growth. Might we see this conservative approach to debt among households persist? It is hard to know the answer to this question ... But there is also a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their current income than in the recent past. It is possible that we are witnessing the early part of a new phase where the household spending and borrowing dynamic is different from the past decade and a half." - Glenn Stevens
Governor of The Reserve Bank of Australia, discussing the 2008 credit crunch, 17 September, 2008.
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[Quote No.29887] Need Area: Money > Invest
"Australians, like their counterparts in North America and Europe, have borrowed way too much and saved far too little. They now face the consequences of their recklessness: namely the necessity that they purge bad debts and ‘investments.’ The trouble is that the RBA [Reserve Bank of Australia], too, has learnt the wrong lesson about the Great Depression. Rather than step aside and allow the purge [deleverage and deflation] to occur, sharply but quickly, it is using every means at its disposal to keep the sordid old game going, i.e., is encouraging people to borrow and consume today [by lowering interest rates] rather than save and invest for tomorrow. Like the Fed and Bank of England, etc., it believes that it can and should countermand market signals – which point unequivocally towards higher interest rates. Higher rates will help to generate the savings that are required to repair the mistakes of the past. At a time when big fires are burning on adjoining properties [other countries’ banks and over-indebted businesses], lower rates accelerate the accumulation of detritus on an already tinder-dry forest floor. Politicians and bureaucrats think that a stroke of a minister’s pen or an Act of Parliament trumps the natural laws of economics. They are sadly mistaken. The RBA’s abject capitulation to the clamour to ‘reduce interest rates’ will NOT help matters: quite the contrary, it will temporarily reward debtors who have made poor investments, encourage them to make additional mistakes and also prompt more people to join the debt bacchanalia. The RBA’s futile attempt to avert (or at least to delay) recession will therefore make the eventual recession worse than it would otherwise be." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29888] Need Area: Money > Invest
"The damage that politicians inflict upon commerce and industry takes a very concrete form, namely the myriad interventionist policies they undertake. But their harm doesn’t end there. More subtle but also very injurious is their threatening rhetoric, i.e., their statements about what’s wrong with the world and who’s caused it, what they would like to do if only they could, what should happen, etc. The effect of these words is to add another layer of uncertainty into entrepreneurs’ plans. The sounder the entrepreneur’s plans and the better his forecasts, the higher will be his profits. If, on the other hand, he overestimates the demand for his goods or services, he will not fulfil his plans and may suffer losses. And if his losses are sufficiently severe, he will face bankruptcy, cease production and exit the market. The world of commerce and industry is innately uncertain. No entrepreneur can say for sure what the prices of his outputs (and hence revenues) will be in the future; nor can he say what the prices of his inputs (and hence costs) will be. Hence he simply cannot know in advance whether his plans will generate profits or losses. He gathers information, analyses it, draws conclusions and acts accordingly; but the investment of capital is ultimately an act of faith. Politicians’ threats to punish entrepreneurs, gaol them in ever tighter regulatory cells and suddenly and unexpectedly abolish old rules and introduce new ones adds to the uncertainty. The greater the uncertainty, the bigger the margin of safety the entrepreneur/investor requires before he will act; and if he decides that uncertainty is simply too great, then he will not invest. Politicians’ rhetoric thus reduces investors’ confidence; and if the rhetoric sufficiently strident, it can induce them to withhold their services. More generally, at the heart of every commercial transaction is an exchange of property. Without clear rules regarding the ownership and exchange of property and confidence that these rules will be respected in the future, the price system and free enterprise cannot function. To threaten or weaken private property rights is, unwittingly or otherwise, to dampen productive and long-term economic activity such as private investment. The presidency of Franklin Roosevelt [FDR] introduced the rhetoric of overt class warfare into American politics. His acceptance speech for the Democratic presidential nomination in 1936 was widely regarded as a declaration of war against free enterprise. He charged that ‘economic royalists’ were attempting to regain the power they had allegedly possessed before the Depression, and that during his first term they had taken every opportunity to block and negate his policies. FDR attacked ‘big business’ and ‘organised money,’ and claimed that they had caused the misery and misfortune that the general public had suffered. Roosevelt’s campaign of 1936 polarised and frightened the public. As a result, the Democrats’ standard bearers for president in 1924 and 1928, John W. Davis and Al Smith, publicly deserted FDR and supported his Republican challenger. So too did Roosevelt’s first director of the budget. These actions had very unfortunate economic consequences. According to Gene Smiley, the author of ‘Rethinking the Great Depression: A New View of Its Causes an Consequences’ (Ivan Dee, 2002), a primary explanation for [America’s] slow recovery [from the Depression] can be found in the concept of ‘regime uncertainty.’ Especially from 1935 on, the New Deal ravaged the confidence of businessmen. As they became less and less certain that private property rights in their capital and its income stream would be protected and maintained – in other words, uncertain about the continuation of the current ‘regime’ of private property rights – they became less and less willing to make investments, especially longer-term investments in structures and long-lived machinery. Increasingly, only short-term investments with quick payoffs were viewed as desirable. Threats to private property rights may come from many sources, including tax increases, new taxes, confiscation of private property, and business regulation that reduces an owner’s rights over property [even threats to nationalize or part nationalise economically important companies effectively punishing the shareholders] The New Deal’s central planners made it quite clear that they sought to create a planned economy in which the government’s plan would crush individuals’ plans. Smiley therefore concludes: ‘the recovery from mid-1935 to mid-1937 and again after the 1937-1938 ‘depression within a depression’ was slow because business was reluctant to invest, expand and undertake potentially risky innovations. They were increasingly uncertain of the rules they were operating under and how secure their property rights were. In the 1930s the Roosevelt administration abruptly and dramatically altered the institutional framework within which private business decisions were made – not just once but several times. The effect was to retard the recovery from the Great Depression of 1929-1933'." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29889] Need Area: Money > Invest
"The supreme insight of the Austrian School’s theory of the business cycle – namely that artificial booms, aided and abetted by central banks, cause real busts. No central banker has ever confessed to others in public, and perhaps not even to himself in private, that when he subsidises the creation of credit and thereby helps to suppress rates of interest below levels that would prevail in free markets, he causes markets to send false signals and encourages investors to undertake poor investments." - Dr Chris Leithner
Of Leithner & Company Pty Ltd, which is a private investment company based in Brisbane, Australia. Quoted From his ‘The Leithner Letter’ – issues 108-110, 26 Dec 2008 - 26 Feb 2009.
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[Quote No.29890] Need Area: Money > Invest
"...the Australian crisis of 1890 and the global panic of 1873 are not just instructive in providing examples of [stock market cycles, how booms and] how crashes happen but as a guide to what works in the aftermath, too... In 1871, Chancellor Otto von Bismarck unified the German Empire and, with the Austro-Prussian and Franco-Prussian wars behind them, the European middle classes were able to consolidate and invest their finances. The formation of lending institutions such as Deutsche Bank led to new mortgage products alongside a boom in sharemarket investment in Paris, Vienna and Berlin. As property prices began to rise in Europe’s major cities, bourgeois investors borrowed more and more to build their dream mansions of the Belle Époque. Meanwhile in the United States – the emerging superpower of its day – cheaper manufactured and agricultural goods were flooding the European market, bringing in foreign currency that could be speculated or re-lent. Yet as the US grew in wealth, it too succumbed to the temptations of financial exotica, with complex investment products built around the development of America’s great railway network. With a new trans-Atlantic ethos of democratised investment, 'Mom and Pop' investors bought into the sharemarket, bond markets soared and those middle-class villas kept on being built in railway-commuter suburbs. In 1873, the bubble burst. The US government fiddled with the dollar, a major issuer of railway bonds defaulted, the Vienna Stock Exchange crashed and one by one banks fell as liquidity seized up. Defaults spread from speculator to suburban mortgagee and over the next two years about 18,000 American businesses vanished and 89 of the country’s 364 railway companies went bankrupt. The 'Long Depression' had begun and it would be another two decades before the global economy would get back on its feet. For Australia – then the quintessential emerging market – the 1870s and 1880s were a boom time. Capital flooded into the colonies and 'Marvellous Melbourne' became the second-largest city in the British Empire. Like boom-towns from Dubai to Shanghai, however, this growth also came to a crashing end. 'A very large number of the banks in Melbourne closed doors,' says economic historian Tony Dingle. 'There was a run on the banks and credit disappeared. The crash and the wreckage of it took about seven or eight years to clear off... Melbourne’s unemployment reached 30%, but perhaps even worse, Sydney stole its mantle as Australia’s biggest city. The nature of the free market changed as well. 'Before the 1890s crash, the Australian economy was fairly deregulated and open, but then it changed. Centralised wage-fixing, tariffs and so forth all come in as a consequence of the 1890s,' Dingle says. Prominent Australian historian Graeme Davison says that like the crisis of 1873, Australia’s crash of the 1890s had its roots in the property market. 'The standard view of what brought about the 1890s depression – as with this crisis we’re going through – was reckless borrowing,' Davison says. Near-bank lenders originated mortgages that were passed on to major banks through further borrowing. Speculators drove up land values and although deposits were taken these were ultimately insufficient when the property bubble burst [so as the property prices fell the equity of the borrowers was eliminated, ruining the speculator] and then the banks had trouble getting all of their loans back when they foreclosed because of the excess supply, credit-crunch related difficulty in getting loans and low business and investor sentiment, drove prices down even further and they took big losses too]. When the near-banks failed, worried depositors turned to the larger banks and the runs began. 'Certainly they had assets to cover their liabilities, but the panicky nature of it all... People were queuing up outside the banks in the morning.' Luckily for us today [in the current 2008 share market crash and recent bank collapses and runs on deposits in the U.S.A., U.K. and Europe], we have support mechanism in place: the [Australian Prime Minister] Rudd guarantee on bank deposits is ample evidence that the [Keynesian interventionist support] system works. And while smaller lenders have been bought out in the US and Australia, there has not been a total meltdown. 'The critical point is that the depth of the depression was attributable to the fact that there was no central bank,' Davison says. 'There was no way for the banks to support each other when there was a crisis of confidence.' The successful companies of Europe and the US emerged amid the ashes of their rivals as the Long Depression and increased regulation fostered consolidation. The financial and resources sectors both saw the return of a clubby environment closed to outsiders and owner-managers with long-term ambitions bought up the debris of their failed rivals. In Australia, mining did well, Davison says. 'The growth of the WA [West Australian] gold fields occurred directly as a result of the 1890s depression, partly as a result of the price of gold, partly due to Melburnians looking for work.' Overseas resources companies also did well. Standard Oil and Carnegie Steel Company are remembered today for dominating their era. In finances, the names Morgan and Goldman came to prominence. Surprisingly, little seems to have changed." - Michael Feller
Published in the 'Eureka Report', 17th October, 2008.
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[Quote No.29891] Need Area: Money > Invest
"[This quote shows what is the worst case scenario when banks have been recklessly loaning at the top of a real estate and share market cycle.] As previous bank write-downs produce a global economic recession and second leg down of the bear market, banks are being hit by a feedback loop: the economic downturn that was caused by the collapse of the credit bubble and the sub-prime write-downs is itself causing more write-downs." - Alan Kohler
Highly respected Australian financial journalist. Quoted from the 'Business Spectator', 17 Oct 2008.
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[Quote No.29911] Need Area: Money > Invest
"...stocks do not always go up over extended periods. Bearish investors might point to the 1929-1954 period, when US stocks essentially gained nothing. [1929 saw the previous seven year booming stock market crash dramatically and then there was the Great Depression and World War II. So it took twenty five years for stocks to regain their 1929 highs.]" - Jonathan Stempel
Financial journalist with Reuters. Published in 'The Business Spectator', 18th October, 2008.
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[Quote No.29912] Need Area: Money > Invest
"[Due to recessionary fears for 2009, after the 2008 stock market crash the Australian Government has brought out a raft of policies to stimulate growth:] Next week we will see the print of the September quarter CPI [inflation measure, which has shown inflation dangerously high - normal is about 2.5%]. Markets' interest in the CPI will be much reduced relative to previous quarters. The Reserve Bank governor, in announcing the 'surprise' 1 per cent rate cut, indicated that he expected inflation to reach 5 per cent before it starts coming down. That concurs with our forecast for next week with headline inflation likely to hit 4.8 per cent up from 4.5 per cent in the June quarter. We forecast readings of 1 per cent for both headline and core inflation in the September quarter. That will see the quarterly underlying inflation measure fall for the second straight quarter – down from 1.2 per cent in the March quarter to 1.1 per cent in the June quarter and the forecast 1 per cent in the September quarter – a modest improvement but hardly a result to excite the Reserve Bank [RBA]. Our experience with the last recession showed how a recession will deal with inflation – very destructively. The recession brought underlying inflation down from 7 per cent to 2 per cent over 3 years – the Bank's current task of bringing it down from 4.5 per cent to 2.75 per cent over two years will be easily achieved if Australia has a recession like the one in the early 1990’s. RBA policy will be focussed on avoiding such a recession but the likely success of the policy will mean that Australia will still have an inflation challenge in 2009 and 2010. That is why we expect an aggressive move in cash rates to around 4.5 per cent by March (expansionary territory) to be eventually followed by a resumption of rate hikes in 2010 as inflation remains stubbornly high. Monetary policy is not the only tool which the authorities are using to combat recession concerns. We also saw a spectacular example of how fiscal policy can be enlisted to assist with the task of heading off the recession risks. I have been working with my colleague Matthew Hassan to develop a cash flow analysis of the impact on household disposable income of the fiscal and monetary policy stimulus. The change in nominal household disposable income is broadly determined by labour income (employment growth and wages growth); fiscal policy (tax rates and income levels); monetary policy (the impact of interest rate changes on interest incomes and payments); and the income of small enterprises including small businesses and farms. Important assumptions in our estimates of the change in household disposable income in both 2007-08 and 2008-09 are: mortgage rates to fall another 150 basis points to next March; employment growth to slow in year average terms from 2.6 per cent in 2007-08 to 1.3 per cent in 2008-09 (increase in the unemployment rate from 4.3 per cent to 5.3 per cent); average increase in wage rates to slow from 3.6 per cent to 3.1 per cent; rate of growth of debt accumulation to slow from 10.3 per cent in 2007-08 to 5.6 per cent in 2008-09; average growth in income of small enterprises slows from 3.3 per cent in 2007-08 to zero in 2008-09. Known fiscal parameters include the $5.1 billion in tax cuts from July 2007; $7.1 billion in July 2008; $10.4 billion in fiscal payments to pensioners; low income families and first home buyers from December 2008. Conclusions are interesting. Firstly the net impact of policy changes and the evolution of the economic outlook will see household disposable income increase by $57 billion in 2008-09 compared to an increase of $50 billion in 2007-08. Growth in household disposable income will increase from 7.7 per cent in 2007/08 to 8.2 per cent in 2008-09. That is despite a substantial slowdown in jobs growth (leading to a 1 percentage point increase in the unemployment rate); a sharp reduction in income growth for small enterprises; and a slowdown in wages growth from 3.6 per cent to 3.1 per cent. Offsetting those factors which will support income growth are the tax cuts; interest rate cuts; the fiscal stimulus; and a slower accumulation of debt. If we are much more pessimistic about jobs growth and assume zero jobs growth, household disposable income will still increase by $47 billion, less than the $50 billion in 2007/08 and a slowdown in income growth pace to 6.7 per cent. Zero average jobs growth would imply an increase in the unemployment rate to 8.3 per cent and through the year jobs growth of -2.5 per cent. That would be a disaster and is extraordinarily unlikely but it does emphasise the significant offsetting impact the fiscal measures have had on household disposable income growth. We have also not taken into account the wealth affects of falling share prices and (probably) lower house prices in 2008/09. Households’ spending behaviours will also be important factors for the economic outlook. Nevertheless the analysis does highlight the importance of stimulatory policies. To increase the growth of household disposable income despite slowing wages and jobs growth is an important achievement in the task to battle the global fallout. Other countries such as US and UK would be envious of the flexibility of the Australian government to raise the growth rate of household disposable income in the current environment." - Bill Evans
Chief economist at the large Australian bank, Westpac. Published in 'The Business Spectator', 17 Oct 2008
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[Quote No.29916] Need Area: Money > Invest
"[The owners of capital, businesses, possessions, etc, have always had difficulty in aligning their interests with the interests of their agents - staff, managers, employees, advisers, brokers, politicians, public servants, etc. For example:] When people are in charge of other people's money, they are inclined to invest it differently than if it were their own money. In the investment industry this is called 'the agency' problem. Their incentives are different from the owners of the money. They often take imprudent risks in order to get a better short-term gain. The reason is that there are few consequences if they get it wrong -i.e. they lose their job or you as a client. If they get it right they get a large bonus or pay rise. It has been summed up as 'Heads I win, tails you lose'. It is better to align their interests with the investors by having them have a significant amount of their own money -'skin' in the game, so that they lose painfully like the investor does if they get it wrong. Best of all, however, is to not delegate such an important responsibility and to take the time and effort required to learn to manage your own investments well. After all who cares more about your money than you do?" - Seymour@imagi-natives.com

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[Quote No.29917] Need Area: Money > Invest
"Bad news is an investor’s best friend. It lets you buy... at a marked-down price." - Warren Buffett
Highly successful value investor, Chairman of Berkshire Hathaway and one of the richest men in the world. Quote from Op-Ed in the 'New York Times', 17 October, 2008.
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[Quote No.29919] Need Area: Money > Invest
"[After a period of easy, cheap credit that drives up company profits and the stock market, comes a day of reckoning when consumer spending weakens, and a recession occurs. Such as in 2008 where there was also a credit crisis. The effect on the consumer is shown in this quote:] Retail sales have fallen for the last three months. This is the first time sales have fallen in such a manner since the record keeping began. They are falling at an annual rate of 2%, which is unprecedented. Auto sales are down, virtually in freefall, with many auto company sales down more than 30% (Volvo is down 50%!). And it may get worse. GMAC, the financing arm of GM [General Motors], has announced it will not lend to anyone whose credit score is not 700 or more! Only 58% of Americans qualify. That means, for a large swath of the consumer marketplace, cheap auto financing is a thing of the past, unless auto companies underwrite loans with guarantees. However, what we are seeing is auto companies abandoning leasing programs and other traditional marketing avenues in order to search for elusive profits. Where you could buy a car two years ago for little or no money down, many dealers are now requiring an average of 12% down. While this makes sense, it is definitely a change. And it is not just in the US. Auto sales throughout Europe are off significantly, especially in countries that had their own equivalent of the US housing bubble. How bad is it? We are becoming a morose nation, staying at home to drown our sorrows - even bar sales are down, almost 1%. While I am sure this audience is doing its part to help out the bartenders of the world, our clients are not. Falling consumer and retail sales are not surprising, given the fact that almost one million jobs have been lost in the last 12 months, bringing unemployment to 6.1%. California, which is a bellwether state, has seen its unemployment rise to 7.7%. That is a (sadly) reasonable target for nationwide unemployment. Back-of-the-napkin analysis suggests that means at least another million jobs will be lost this [economic/business/share market] cycle. Falling consumer sales are showing up in the share prices of retailers and shopping mall REITs [Real Estate Investment Trusts]. Many are down to prices last seen 12-16 years ago, with price drops far below the market averages. Think Vegas is immune? MGM and Trump, to name just two, are down 90%! But we lost a lot of jobs in the last (2001-2002) recession, and consumer spending did not go down. Won't the present trend reverse soon? Might it not just be from the shock of the credit crisis? And with gasoline prices down, giving us a $100 billion plus 'tax break', is the worst not over? It is reasonable therefore to ask why it should be different this time. Predicting the demise of the American consumer has been a favorite pastime of bearish analysts for over 50 years. And they have always been wrong. The American consumer has proven resilient through feast and famine, war and peace. But, the data and circumstances suggest this time may be different. Let's look at the data that came out this week on the delinquency rates of various types of consumer debt. The delinquency rate on auto loans is 3.8%, up from 2.9% two years ago. Consumer finance? Up to a very high 8.3%. Credit card delinquencies are 4.8%, rising from 4%. Is it any wonder credit card companies are cutting credit lines and raising interest rates to try and stem the bleeding? Mortgage delinquencies have doubled from 2.5% to a current 5%. Consumer credit in general is up to 5% delinquent, more than two-thirds higher than two years ago. This is all illustrative of a consumer in trouble. ...new home sales forecasts are at all-time lows. Traffic (potential buyers) looking at new homes is dismal. In my own area in Dallas, there are brand new homes which builders are willing to lease at very attractive rates in order to generate some cash flow, at much less than the cost of buying. And given the level of prospective buyers looking for a new home, that is a trend likely to continue. I should note that this morning housing permits fell to a 26-year low, around 786,000. But that statistic can be misleading. Back in 1982, the population of the US was 230 million. Today it is 305 million. We are roughly one-third larger. If you adjust for population, the number would be in the 600,000 range, which is far worse than a mere 26-year low. Those permits mean jobs, and permits need to rise with the population to maintain the job base. And since we're looking at today's data, the Michigan consumer sentiment number simply fell off a cliff, plunging to 57 from over 70 last month and an average of 85 last year. It was only a few years ago that the number was over 100. The last time it was this low? We were in the midst of a very serious recession in 1982. ...Mortgage applications for purchases are down by over 30% since the end of 2007, and down much more than that from the peak of 2006, as the subprime lending market has disappeared. Let's pay particular attention to the fall-off in applications for re-financing, down by almost 60%. This was the source of mortgage equity withdrawals [MEWs], which fueled consumer-spending growth even in the face of the last recession. Let's look at ...work done by James Kennedy and Alan Greenspan, on the effect of mortgage equity withdrawals (MEWs) on the growth of the US economy...in both 2001 and 2002, the US economy continued to grow on an annual basis (the 'technical' recession was just a few quarters). Their work suggests that this growth was entirely due to MEWs. In fact, MEWs contributed over 3% to GDP growth in 2004 and 2005, and 2% in 2006. Without US homeowners using their homes as an ATM [Automatic teller's machine], the economy would have been very sluggish indeed, averaging much less than 1% for the six years of the Bush presidency. Indeed, as a side observation, without home equity withdrawals the economy would have been so bad it would have been almost impossible for Bush to have won a second term. Now let's look at the update...the actual numbers for new mortgage equity withdrawals through the second quarter of this year. And what they show is MEWs simply withering on the vine. The engine of our GDP growth has essentially been turned off. Look at the fall in the numbers for yourself: In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. [and]...translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP. The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter! While credit card growth has indeed risen to take up some of the 'slack,' it is nowhere near the previous levels of MEWs. With almost 20% of American mortgages either now or soon to be 'under water,' and because lending standards [criteria] are tightening, it will be a long time before we see a significant upsurge in home equity withdrawals. Whatever growth we see in the next few years will have to come from old-fashioned sources, like real productivity and reality-based lending. Homeowner hallucinations are a thing of the past... It is likely that whatever recovery we see will be slow in coming. Without MEWs, the period from 2001-2007 would have seen GDP growth of less than 1%! What has changed for the better? It is going to be a rather serious recession and a slow Muddle Through recovery of several years. Unless [politicians] Obama, Pelosi, and Reid push through their tax increase. Then it will be a lot longer. Maybe even a repeat of 1980 and 1982, where we had back-to-back recessions in two years. Increasing taxes in a recession is the worst possible economic policy. You increase taxes, from an economic perspective, in good times. Last year, I predicted we would see three things as a result of the bursting of the housing and credit crisis bubbles: -1. We are in a period where earnings disappointments are going to be the rule, not the exception. -2. Lower corporate profits puts pressure on the stock market, -3. Resulting in lower than expected long-term returns. Let me add a fourth. The psyche of the American consumer has been seared, and perhaps permanently. The Paradox of Thrift: We are (finally!) going to see US consumers start to increase their savings. Increasing home prices and increasing stock prices made many consumers feel comfortable that their retirement future was assured. [The so called positive 'wealth effect'] Now that feeling has been crushed. [The so called negative 'wealth effect'] Home values are not likely to bounce back for a very long time. And as I have written for a long time, we are facing a low-return environment for stocks. Now, while it is a good thing for an individual to save money, it is not good for the economy as a whole, at least in terms of consumer spending and GDP growth. This is the Paradox of Thrift... The lack of the ability to borrow on homes, coupled with the need to save more money, is going to put a large dent in the US and world economy....We are going to a new, lower level of consumer spending on an absolute basis, and perhaps as a percentage of GDP. Once that new level has been reached, we will start slowly growing from there; but until that point, the growth of the US economy is going to be severely challenged. We got ahead of ourselves through borrowing and confidence in the bull market, and now we have to deal with the new reality." - John Mauldin
President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states of the U.S.A. Published 17th October, 2008.
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[Quote No.29921] Need Area: Money > Invest
"When prices start to fall [deflation] because of lack of demand, they can go well below the cost it takes to produce products. Companies have no alternative than to cut back production and lay off a lot of workers [rising unemployment]. That cuts demand more. You get this vicious downward spiral in prices." - Bernard Baumohl
executive director of the Economic Outlook Group. Quoted from CNNMoney.com October 17, 2008.
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[Quote No.29928] Need Area: Money > Invest
"For they sow the wind [rather than fertile soil], and [therefore] they reap the whirlwind." - Bible
Hosea 8:7
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[Quote No.29930] Need Area: Money > Invest
"To repeat our mantra: global profit margins were recently at record highs. Profit margins are the most provably mean reverting series in finance or economics. They will go back to normal. After big moves, they almost invariably overrun. With the current set of global misfortunes, they are very likely to overrun considerably this time." - Jeremy Grantham
Legendary value investor, Chairman and Chief Investment Strategist of Boston money management firm, Grantham Mayo Van Otterloo (GMO). Quoted from his 'Quarterly Letter', October 2008.
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[Quote No.29931] Need Area: Money > Invest
"In contrast, what we do know, I believe, is asset class pricing and the behavior of bubbles, which are both derivatives of our single, big truth: mean reversion. Bubbles Breaking: Back in 2000, as we continued to shake in our boots as the mad tech bubble kept defying gravity, we tried to reassure ourselves by looking at historical bubbles. We found 28 bubbles since 1920, defined arbitrarily but reasonably as two-standard-deviation events that in a Gaussian world should occur once every 40 years. All but one burst all the way back to the trend that existed prior to the start of the bubble. The single exception was the S&P 500 itself in 2000-02. Under the influence of what I’ve called 'enough stimuli to get the dead to walk, the S&P, down from 1550, could not quite reach its trend value, which we had calculated to be 725. Instead it rallied at 775. (It had to fall 55% to reach trend, but fell 50%. Close, but no cigar. But, more critically, we had expected a fairly major overrun, which is historically so common.) Seeing this aberrant event led us to describe the market advance from 2002-07 as 'the biggest sucker’s rally in history.' Now a wrinkle here is that, unlike most, we measure bull and bear markets based on their trend line growth after adjusting for inflation. The real growth in the index has historically been only 1.8% per year for the S&P, but for technical reasons (low payout rates in particular) we have allowed for moderately more real growth in recent years. In the six years since October 2002, the trend line [Note: Trend is 2% real price appreciation per year. Detrended Real Price is the price index divided by CPI+2%, since the longterm trend increase in the price of the S&P 500 has been on the order of 2% real] has risen to 975 (plus or minus a little – we are constantly fine-tuning a percent here or there). Needless to say, two weeks ago the market crashed through that level...So now all 28 burst bubbles are present and accounted for. Long live [long-term] mean reversion! [the successful investor's best friend] Our 10-year forecast for the S&P 500 10 years ago was a lowly -1.1% real, an extreme outlier among forecasts. At the end of September the real return was exactly nil (0.0%). But it only took three days of October to hit our -1.1% forecast on the nose! Ten years and three days. For emerging equities, our forecast was +10.9% real and the actual was +12.8%. Not too bad, but even here in seven days – horrible days, admittedly – the return of emerging crossed our forecast on the way down. So today (October 10), our forecasts of 10 years ago were optimistic, if you allow us a few days’ leeway. Where Are We Now? So brandishing our old 10-year forecasts and resisting the idea that even a blind pig will occasionally find a truffle, we have had some confidence in saying that by October 10th global equities were cheap on an absolute basis and cheaper than at any time in 20 years. Full disclosure requires that we add that, in our opinion, this is not as brilliant as it sounds, for markets have been more or less permanently overpriced since 1994 and have not been very cheap since 1982-83 and perhaps a few weeks in 1987. There is also a terrible caveat (isn’t there always?) ...the three most important equity bubbles of the 20th Century: 1929, 1965, and Japan in 1989. You will notice that all three overcorrected around their price trends by more than 50%! In the interest of general happiness, we do not trot out these exhibits often and, until recently, they would have been seen as totally irrelevant and perhaps indecent. But, after all, it’s just history. Being optimistic like most humans, we draw the line at believing something so dire will happen this time. We can hide behind the fact that there are only three data points, and therefore no self-respecting statistician can give them much weight. We can convince ourselves that things are different this time since the background to each of the four events, including this one, is different. One of them had high inflation; three, including the current situation, did not. Japan and 1929 were characterized by complete incompetence, while this time we had only – shall we say – very widespread incompetence. This time we have thrown ourselves more quickly into battle, although not so quickly as some would have liked. Not all of the differences are favorable: we have a more global, interlocking, and complicated system, including non-bank players like hedge funds. We also have the 'financial weapons of mass destruction' – asset-backed securities that are tiered and sliced and repackaged – and, perhaps most destabilizing of all, totally unregulated credit default swaps. Did we have even more greed and short-term orientation this time than they did? Well, we certainly didn’t have less! Still, a 50% overrun seems unacceptable. Probably governments would feel that the consequences of such a loss in asset value would simply be too awful and would do anything to prevent it. And perhaps, just perhaps, their 'anything' would work. But a reasonably conservative investor looking at the data would want to allow for at least a 20% overrun to, say, 800 on the S&P 500, and have a tiny portion of their brain loaded with the notion that it just might be quite a bit worse. The Curse of the Value Manager: We at GMO have a strong value bias, and our curse, therefore, like all value managers, is being too early. In 1998 we saw horribly overpriced stocks that at 21 times earnings equaled the two previous great bubbles of 1929 and 1965. Seeing this new 'peak,' we were sellers far, far too early, only to watch it go to 35 times earnings! and as it went up, so many of our clients went with it, reminding us that career risk is really the only other thing that matters. The other side of the coin is that only sleepy value managers buy brilliantly cheap stocks: industrious, wide-awake value managers buy them when they are merely very nicely cheap, and suffer badly when they become – as they sometimes do – spectacularly cheap. I said as far back as 1999, while suffering from selling too soon, that my next big mistake would be buying too soon. This probably sounded ridiculous for someone who was regarded as a perma bear, but I meant it. With 14 years of an overpriced S&P, one feels like a perma bear just as I felt like a perma bull at the end of 13 years of underpriced markets from 1973-86. But that was long ago. Well, surprisingly, here we are again. Finally! On October 10th we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will therefore be steady buyers at these prices. Not necessarily rapid buyers, in fact probably not, but steady buyers. But we have no illusions. Timing is difficult and is apparently not usually our skill set, although we got desperately and atypically lucky moving rapidly to underweight in emerging equities three months ago. That aside, we play the numbers. And we recognize the real possibilities of severe and typical overruns. We also recognize that the current crisis comes with possibly unique dangers of a global meltdown. We recognize, in short, that we are very probably buying too soon. Caveat emptor ...(P.S. The rally of October 13th may usher in a more sustained rally and help resuscitate animal spirits so that we might be able to limp through to my original target of a market low in 2010, but don’t hold your breath.) If the U.K. plan (also advocated by both Soros and Buffett independently) had not been widely adopted and the global authorities had followed the dithering U.S. lead, we would have been set up for some very unusual developments. The market would have continued to fall for a few more weeks or worse (as by October 16th it seems to be doing) until eventually the world’s central bankers got their act together. The imputed seven-year returns by then might have reached, say, 15% real per year for emerging, 11% for the U.S., and, say, 12% or 13% a year for EAFE. These exceptional opportunities, nearly equal to the legendary lows of 1982 and 1974, would have set up, in my opinion, a paradox from hell for serious investors. They would have been looking forward to an 18-month-long diet of sustained genuine disappointments; disappointments in both economic growth globally and, more importantly, in global earnings for the market’s consensus. Yet into those disappointments the market would likely have steadily risen because the recovery from the extreme lows of the panic would have inadvertently and accidentally more than offset all the bad news. This would have proved intellectually very difficult to deal with: you predict an unpleasant surprise, but yet you should buy! It would have been a rare historical event, which a big rally here may change. Still, you never know your luck. Something like it may still happen. (For the record, in 1932 a rally of 111% started in the face of persistent disastrous economic news.)" - Jeremy Grantham
Legendary value investor, Chairman and Chief Investment Strategist of Boston money management firm, Grantham Mayo Van Otterloo (GMO). Quoted from his 'Quarterly Letter', October 2008.
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[Quote No.29933] Need Area: Money > Invest
"[Not every person agrees with governments intervening in 'free' markets, as recommended by Keynesian economic theory. Austrian free market economists don't. They believe it makes things worse by distorting real 'price discovery' and just delays the economy's recovery to health. For example, here's a quote about the 2008 credit crunch, stock market crash and looming recession which some fear will become a depression:] Every journal, every television commentator, every newspaper, every economist - all agree: the risk of a meltdown is too great to ignore. The feds [Federal Reserve] had to take action. 'Just as there are no atheists in a foxhole, there are no economic fundamentalists in a crisis like this,' says Jared Bernstein, an economic advisor to [U.S. Democratic presidential candidate] Obama. 'Governments have at last thrown the world a lifeline,' writes Martin Wolf in the Financial Times. 'We didn't want to do it...but we had to take action,' Hank Paulson [Federal Reserve Chairman] told the world. Nobody wants a financial meltdown; everyone agrees that rapid and forceful state intervention is necessary... Meltdown? What's wrong with a meltdown? Why shouldn't bankers fear to lend? Why shouldn't prices go to what willing buyers and sellers will accept? Why should Wall Street be bailed out? Why shouldn't investors take the losses they deserve? Why shouldn't house prices fall rapidly? Why shouldn't the mistakes of the past five years be corrected quickly, in other words? The financial crisis was caused by too much ready credit... Because of it, people made mistakes. Investment mistakes. Business mistakes. Spending mistakes. Even lifestyle mistakes. Those mistakes need to be corrected. ...at the height of the bubble people thought that capitalism [irrationally escalating share and real estate prices] would make them rich. Now that the bubble has popped they believe that government must step in to save them from capitalism. Both ideas are equally and oppositely absurd. [Ideally the cause of the problems in the economy, namely too cheap and easy credit for non-productive uses for too long, should have been gently withdrawn earlier when asset bubbles were appearing, through a counter-cyclical fiscal policy of increased taxes and a monetary policy of higher interest rates, higher bank capital adequacy ratios and tighter lending standards. This part of Keynesian economic theory is usually forgotten until the bubbles it was supposed to stop have occurred and governments then decide to follow the second part of his advice to to stop price falling through consumer and business stimulation methods. Without the correct balance between both economic contracting and expanding methods however, of course there will be a problem as there is in 2008. The problem of the business cycle, of boom and bust, has a two part solution. Applying only part of it will at best bring about only a partial solution or at worst make things worse.] " - Bill Bonner
Financial author, founder of Agora Publishing and 'The Daily Reckoning' financial newsletter. Published in the latter, 17th October, 2008.
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[Quote No.29935] Need Area: Money > Invest
"The costs of restructuring capital are easily absorbed during a policy-induced boom when credit is cheap and profit expectations are high. But after the bust, the costs of undoing the misallocations caused by unduly cheap credit take the forms of business losses, bankruptcies, and unemployment." - Friederich Hayek
Famous Austrian [free market] economist
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[Quote No.29936] Need Area: Money > Invest
"If the interest rate is held below its market, or 'natural,' rate by credit expansion, the decisions of producers will be inconsistent with the preference of consumers. The economic expansion will be unsustainable. The boom will end in a bust. Only with a market-determined rate of interest can cyclical variations be avoided." - Roger W. Garrison
Professor of Economics, Auburn University, Alabama, U.S.A.
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[Quote No.29937] Need Area: Money > Invest
"The [2008] crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression. At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow - a V-shaped six month recession - has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession - like the one experienced by Japan after the bursting of its real estate and equity bubble - cannot be ruled out. At this point the risk of an imminent stock market crash - like the one-day collapse of 20% plus in U.S. stock prices in 1987 - cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown. A vicious circle of deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway." - Nouriel Roubini
Professor of Economics at the NYU Stern School of Business. Quote from October, 2008.
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[Quote No.29943] Need Area: Money > Invest
"But [Australian and New Zealand bank chief economist, Saul] Eslake says that this [2008] US recession will be different to past ones. 'Recessions are usually induced by the response of businesses to high interest rates or other sources of financial pressure (a response which typically entails cuts in payrolls [employment], production and orders, and capex [capital investment]), while recoveries are induced by cuts in interest rates which prompt households to borrow and spend more, which in turn eventually leads businesses to start employing, producing and investing again.' 'However, this time around one of the key drivers of this recession is household deleveraging – i.e. households do not want to borrow or spend, they want to reduce debt and increase saving [as they have historically high debt to asset and interest costs to income ratios]. So it will be harder for the traditional remedies for recession to work. In addition US, has far less scope to use the traditional remedies like lower interest rates because its rates are already low and its deficit is already running at close to $US500 billion, and with another $1 trillion or so being added to the public debt to fund the financial system bail-out.' Nevertheless, Eslake suspects that the Obama Administration (the likely Presidential winner) may need to close its eyes to the deficit in the short-term, and just spend what they think they need to in order to get the economy moving again – with the emphasis being on direct spending rather than tax cuts." - Robert Gottliebsen
Highly respected Australian financial journalist. Published in 'The Business Spectator', 20 Oct 2008.
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[Quote No.29944] Need Area: Money > Invest
"[If a company releases its profit results earlier than originally planned, there is usually a reason. Trying to understand why can help you invest successfully.] Australian-listed allfinanz group Suncorp-Metway earlier in October 2008 had been inviting bids for its banking division. While ANZ Banking was preparing an offer but ultimately withdrew it due to the impact of the global financial crisis, rival National Australia Bank (NAB) is believed to still be interested. There is speculation that this is part of the reasons why NAB is issuing its 2007-08 profit results earlier than originally planned. On 17 October, NAB stock closed $A1.10 lower $A21.60, while Suncorp was up $0.29 at $A8.39." - Unknown
'The Australian' newspaper, 20 Oct 2008
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[Quote No.29945] Need Area: Money > Invest
"If, in thinking, you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity." - Charlie Munger
Lawyer and business partner of Warren Buffett, with the position of Vice-Chairman of Berkshire Hathaway Inc. Highly successful value share investor in his own right.
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[Quote No.29946] Need Area: Money > Invest
"I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes." - Charlie Munger
Lawyer and business partner of Warren Buffett, with the position of Vice-Chairman of Berkshire Hathaway Inc. Highly successful value share investor in his own right.
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[Quote No.29963] Need Area: Money > Invest
"[Beware:] Success produces confidence; confidence relaxes industry [effort], and negligence ruins the reputation [and profits] which accuracy had raised." - Ben Jonson
(1573 - 1637) English dramatist
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[Quote No.30094] Need Area: Money > Invest
"The boom lasted longer than the pessimists expected and the decline will probably last longer than the optimists hope." - Alan Kohler
Respected Australian financial journalist. Quoted October, 2008.
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[Quote No.30095] Need Area: Money > Invest
"I recall to those of you who are bridge players [Warren Buffett and Bill Gates are bridge players] the emphasis that bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money – in the long run. [This is true of successful card players and gamblers everywhere. They know and use the odds.]" - Benjamin Graham
The 'Father of Value Investing' in shares, that taught Warren Buffett. Quote from his best-selling book, 'The Intelligent Investor'.
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[Quote No.30096] Need Area: Money > Invest
"[Because of the importance of banks to a country's economy, especially in the current credit crisis and looming recesssion, the following article has been reprinted. It covers a number of important issues for investors to consider before investing in banks:] National Australia Bank kicked off the bank profit reporting season with some positive messages for shareholders and a subtle warning for borrowers. Shareholders across the banking sector will take heart from NAB's reassurance that it would be able to maintain its dividend payout ratio at the normal level of about 67 per cent and that it would not need to make a rights issue in response to the credit crisis. The dividend for the full year rose by 6 per cent to $1.94. The payout ratio hit more than 80 per cent because of the hit from NAB's foray into asset backed securities and collateralised debt obligations. NAB was regarded as one of the two weakest of the major banks along with ANZ, so its reassurance about dividends and capital will be particularly welcome. NAB said its decision to underwrite its dividend reinvestment plan over the next year would raise an additional $2 billion in capital with the first DRP underwriting taking Tier 1 capital to 7.64 per cent. Borrowers will be concerned that NAB has flagged a much tighter control of lending including the likely imposition of higher loan to valuation ratios for business customers. NAB chief financial officer Mark Joiner hinted that the bank's lending criteria for different sectors of the economy would be reviewed to ensure the bank's lending provides a natural buffer against sectors caught in a cyclical downturn. Defensive sectors of the economy may find it easier to borrow than those in sectors most exposed to a recession. The other big theme from the NAB results was the ratcheting up of provisions to cover the bad and doubtful debts that will inevitably flows from the downturn in the economy. NAB boosted its collective provision by $647 million in the year to September 2008 and by $340 million from March 2008. The 32 per cent rise in collective provisions to $2.6 billion will lift NAB's coverage for bad loans to a level above all other banks except ANZ. The collective provision includes a $214 million adjustment to cover uncertainty in the global economic environment. NAB was forced to write off some big exposures to troubled companies and its impaired assets increased by $1 billion over the year. Mortgage delinquencies rose in Australia and New Zealand taking the retail delinquency rate to 0.81 per cent, up 10 basis points. Joiner and new CEO Cameron Clyne were careful to warn banking analysts that the banking sector as a whole would be hit by higher levels of bad and doubtful debts. But they also said that there would be asset growth in business and mortgages. Joiner said that if this growth was accompanied by tight risk management and a continued focus on cost control then there was no reason why profits should not keep growing. NAB's net interest margin provides a handy gauge of how the bank coped with the dislocation in credit markets. It dropped 8 basis points to 220 basis points between September 2007 and September 2008 as funding costs rose, competition increased for deposits and the bank held greater levels of liquidity. But it is significant that between March and September as the credit crisis escalated, NAB's net interest margin rose from 214 basis points to 225 basis points as the bank cranked up interest rates and enjoyed strong deposit growth. Outgoing CEO John Stewart said NAB was holding about $60 billion in liquidity at September 30, or about $35 billion more than was necessary under regulatory rules. And he said the bank was confident of fulfilling its term funding of up to $19 billion in 2009, having raised $28 billion in 2008. Overall the NAB result was further evidence of the resilience of the Australian banking system. It showed how a strong Australian franchise could withstand a recession in a major market (New Zealand), a dog of a performance by a UK subsidiary and a $1 billion risk management failure in the United States." - Tony Boyd
Financial journalist. Published in 'The Business Spectator', 21 Oct 2008.
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[Quote No.30098] Need Area: Money > Invest
"The share market's up and down price cycles and investors' attitudes can be neatly summarised in the often repeated phrase, 'Gloom [then] Boom [then] Doom [and repeat]'." - Seymour@imagi-natives.com

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[Quote No.30099] Need Area: Money > Invest
"[In times of easy credit, loose lending standards and irresponsible decisions can be encouraged by poorly devised incentives:] Bank workers want a charter of responsible lending to be enforced, warning that under performance pay schemes they are pushed to approve loans just to earn a decent wage. Salaries in the industry are commonly linked to benchmarks such as finding loan customers, a practice the Finance Sector Union believes has added to irresponsible lending practices. A survey by the union of 2000 workers found that 59 per cent felt pressured to approve inappropriate services to meet targets, and 52 per cent said they approved financial services they felt customers did not need. The union's acting national secretary, Rod Masson, said his members wanted a charter of responsible lending to be taken up by the industry [in Australia following the 2008 credit crisis]." - Jonathan Dart
Published in the 'Sydney Morning Herald' newspaper, October 21, 2008.
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[Quote No.30102] Need Area: Money > Invest
"[Government intervention in free markets, as Austrian economists say, produces distorted price signals, unintended and unexpected positive and negative consequences and increased uncertainty and forecasting difficulties, as the following article shows regarding the government's response to the 2008 credit crisis:] Overnight the US Federal Reserve announced it would fund up to $US540 billion of purchases of short-term debt from money market mutual funds. That’s the kind of response to the US government’s guarantees of bank deposits and term funding that the Rudd Government is going to come under significant pressure to introduce here. The freezing of mortgage trust redemptions, the rush by cash management trusts to invest in guaranteed paper and the lobbying by investment banks and foreign banks to be included within the coverage of the guarantees have been the predictable flow-on effects of the government’s decision. In the US, activity in commercial paper markets has seized up and money market mutual funds, analogous to our cash trusts, were experiencing massive redemptions and liquidity pressures as investors rushed for the shelter of the $250,000 deposit guarantee. That, in turn, has impacted on the ability of the banks and US companies to raise short-term funding. That fallout from the introduction of deposit and term funding guarantees is at the heart of the Australian government’s consideration of introducing a charge – an insurance premium – for large deposits. It fears that funds that might otherwise be available in short-term money markets will be diverted towards the guarantees unless some cost is imposed on large deposits. But such decisions, taken by governments and their financial regulators around the world, to guarantee bank liabilities create two problems. One is that, in the current fearful environment, price is of far less consequence than security. The other is that, in a mass flight to safety, the less safe suffer. Even if an insurance premium is levied on large deposits, there is no certainty that it will create neutrality in decisions about where those funds flow (assuming that those with $1 million or more to deposit aren’t clever enough to find a loophole that enables them to avoid paying the premiums). And, the moment the guarantees were announced, there were inevitably going to be unpleasant and unavoidable knock-on effects for those institutions and entities outside the boundaries of the guarantees. That has already been happening. As the credit crisis has escalated, funds have been flowing at an accelerating rate out of the non-bank sector and into the banks, particularly the major banks, with investors choosing security over returns. The guarantees might amplify this trend, but they aren’t its cause. There are mortgage trusts that had been frozen well before the guarantees were announced and there had been some diversion – which was mounting – of funds from cash trusts to bank deposits. The guarantees were about shoring up the more vulnerable players within the regulated part of the system, who were starting to experience liquidity pressures as funds migrated towards the majors, not providing lifelines for organisations outside the Australian Prudential Regulatory Authority’s supervisory net. The heightened risk aversion of investors in the midst of the worst financial crisis since the 1930s is rational and provides no compelling argument that taxpayer guarantees should be provided to institutions outside the authorised deposit-taking institutions regulated by APRA. The guarantees formalise the distinction between APRA-regulated institutions and the rest. To keep US money markets operating, the Fed is going to provide secured funding to five new special purpose vehicles that will buy high-quality but short-term assets – including bank-issued paper – from money market mutual funds, thus injecting liquidity into the funds and enabling them to meet redemptions and to continue to invest in money markets. Treasury and the Reserve Bank are wrestling with that same problem, although the Fed’s interventionist approach would probably be their option of last resort. At this point they appear to be focused on using price signals to try to ensure the flow of funds isn’t exclusively into bank deposits and term funding. Whether that will work, of course, remains dependent on the extent to which the fear that capital could be lost is countered by the greed for better returns." - Stephen Bartholomeusz
Australian financial journalist. Published in 'The Business Spectator', 22 Oct 2008.
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[Quote No.30103] Need Area: Money > Invest
"[The decline in the Baltic Dry Index points to a global recession, and is perhaps the best economic indicator that includes China.] The Baltic Dry is a composite index of shipping freight rates across 20 odd major dry bulk carrying routes and covers all three types of ships – Capesizes, Supramaxes and Panamaxes. The index is dominated by the large capesizes (150,000 tonnes plus) ships which operate on both time charter and voyage charter basis and typically carry raw materials for steel manufacturers (iron ore and coking coal mostly) who in turn make steel for automobile manufacturers as well as building and construction companies. As the supply capacity is very difficult to adjust up and down (large capesizes cannot be created or destroyed without at least a few years time), it gives an accurate indicator of the forward-looking volume demand for iron ore and coal from manufacturers. Hence, it serves as a very reliable forward indicator of the level of global manufacturing activity. For example, if steel makers are buying more iron ore, it means their projected demand from car companies and builders is looking very strong and vice versa. China obviously is the biggest iron-ore and coal demand driver and Brazil and Australia are the biggest iron-ore supply drivers. Because it is not distorted by financial market considerations and impacted mainly by volume shipped, it is a very robust indicator of the level of global trade and economic activity (in my opinion). Hence it points to a serious global recession, now, in my view." - Sri Annaswamy
Trade adviser based in Sydney, Australia. Published in 'The Business Spectator', 22nd October, 2008.
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[Quote No.30104] Need Area: Money > Invest
"[Changes to interest rates, both up and down, usually take between 9 to 12 months to show up in bank and other company accounts, although stock markets as forward-looking, leading economic indicators, usually but not always, take this into account almost immediately.] Home loan defaults, which have been rising sharply over the past year, tend to lag interest rate increases by about 12 months." - Tony Boyd
Published in 'The Business Spectator', 22nd October, 2008.
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[Quote No.30105] Need Area: Money > Invest
"You've got to understand, when you tell people in government 'you've got to restrict mortgage lending [easy credit policies - i.e. loose monetary policy and low interest rates]', the response is 'we don't want to discourage home ownership'. [In seeking to make home ownership as accessible as possible, successive governments were] letting a political impulse get the better of financial responsibility. [which eventually led to the sub-prime loan crisis, higher home mortgage foreclosures, increases in bankruptcies, the 2008 credit crunch, stock market crash and US recession. Putting populist politics and re-election before responsible economics is one of the great dangers of government intervention in free markets, as expounded by the Austrian free market school of economic thought.]" - David Hale
a private-sector US economist who has provided briefings for US President George Bush. Quoted in Australia, October, 2008.
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[Quote No.30109] Need Area: Money > Invest
"The worst time for a company to try to raise capital [credit or equity - placement or underwritten rights issue] is when it is most needed, as banks, existing investors and the market see it as an admission of deep trouble, which makes banks think twice about lending, even at very high interest rates, and the market will mark down its price significantly - often to the rights issue price or lower, after the trading halt, immediately reducing the loan to value ratios. It's like the old joke that the time to ask to borrow an umbrella from a banker is when the sun is shining. The best thing for companies is to start stress testing their profits for possible recession conditions and reducing their debt - short and long term - to equity ratios, lengthening the average maturity date and increasing their unused overdraft facilities before the top of the business cycle just as the interest rates are being raised to slow inflation.]" - Seymour@imagi-natives.com

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